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The Asia-Pacific Arbitration Review 2018

Philippines

The Philippines has long appreciated the importance and utility of the concept of arbitration. Despite this history of supporting alternative modes of dispute resolution, arbitration, most especially international arbitration, has not taken off in the manner that it has in most other countries. International arbitration in the Philippines would enjoy strong support from the law and the rules already in place, as well as jurisprudence and general state policy. In this chapter, we will present the various laws in force in the Philippines with respect to arbitration in general, and international arbitration, as well as outline jurisprudence that influences arbitration practice in the country. We will also analyse trends that are useful for international practitioners interested in arbitration in the Philippines.

Existing legislative enactments with respect to arbitration

Civil Code of the Philippines

The Spanish Civil Code, which was applicable in the Philippines prior to its repeal, had provisions on compromises and arbitration. These provisions were repealed by implication with the repeal of the Spanish Law of Civil Procedure, and were later reinstated in the new Civil Code.1

Title XIV, Chapter 2 of Republic Act No. 386, otherwise known as the Philippine Civil Code, approved on 18 June 1949, is the first law the Philippine Congress passed that mentioned and governed arbitrations. This Chapter refers to Chapter 1 of the Civil Code on compromises on several provisions. While Chapter 2 of the Code is only composed of five provisions, they nonetheless emphasise that awards by arbitrators are final and valid, and can only be questioned on the following grounds: mistake, fraud, violence, intimidation, undue influence, or falsity of documents.

The Arbitration Law of 1953

Apart from the Civil Code, the first law to address arbitration specifically was Republic Act No. 876, known as the Arbitration Law, enacted in 1953. Philippine law already recognised that parties may submit their controversies to one of more arbitrators of their choice, subject to a contract agreeing to settle their issues through arbitration. The Law provides for exceptions to its scope, which include cases subject to the jurisdiction of other tribunals. There are also provisions for the form of the agreement, requiring arbitration clauses to be in writing, and subscribed, and may be enforced by the court of first instance. How an arbitration is instituted is likewise contained in the Arbitration Law, which starts with the demand for arbitration. The remedy for a party against another party that fails, neglects or refuses to perform under the arbitration agreement is also specified (ie, they must petition the court to direct the opposing party to proceed to arbitration). Other aspects of arbitration, such as the appointment of arbitrators, qualifications of arbitrators, challenge to arbitrators, arbitrator oath, procedure to be followed in the arbitration, powers of arbitrators and the nature of the arbitration proceedings are also specified in the Arbitration Law. Other important aspects of the Law include the procedure to be followed for the confirmation of the award, and grounds for its vacation, modification and correction. It did not repeal the provisions of the Philippine Civil Code.

The Alternative Dispute Resolution Act of 2004

More than 50 years after the enactment of the Arbitration Law, Republic Act No. 9285 (the Alternative Dispute Resolution Act of 2004 (the ADR Act)) was passed on 2 April 2004. This time, the law clearly expressed the policy of the state with respect to alternative modes of dispute resolution: to actively promote party autonomy and to encourage and actively promote the use of alternative dispute resolution (ADR) methods. Thus, through the law, means are provided for the use of ADR and the private sector is enlisted to participate in the settlement of disputes, including the establishment of the Office for Alternative Dispute Resolution. Other than arbitration, the law provides for the use of mediation and other forms of ADR such as third-party evaluation, mini-trial, mediation-arbitration or a combination thereof. It is also through the ADR Act that international commercial arbitration was recognised in the Philippines and the Model Law on International Commercial Arbitration was adopted, including rules on the interpretation of the Model Law.

There is a whole chapter in the ADR Act on the subject of international commercial arbitration, which lays down provisions on legal representation, confidentiality and the interpretation of the Act. Once more, the policy of the law in favour of arbitration is stressed. There is also a provision on the interim measures that are available to the parties to prevent irreparable loss or injury, provide security for the performance of any obligation, produce or preserve any evidence, or compel a party or non-party.

The Act, however, does not expound on the issue of domestic arbitration, as this issue is still governed by the Arbitration Law, except for particular provisions concerning international commercial arbitration that would also apply to domestic arbitration.

With regard to judicial review of arbitral awards, domestic awards are enforced in the same manner as decisions of the courts but require confirmation by the regional trial court. Construction Industry Arbitration Commission (CIAC) awards need not undergo confirmation (the CIAC framework is discussed below). There is also specific reference to the New York Convention in the ADR Act, but only with regard to foreign arbitral awards. It is also here that the difference between foreign arbitral awards where the New York Convention may be applied, and to those awards not covered by the Convention, is first noted.

Construction Industry Arbitration Law of 1985

One of the special industries that has its own arbitration rules is the construction industry. Executive Order No. 1008, signed on 4 February 1985, cites the need to establish arbitral machinery to settle disputes within the construction industry expeditiously, and created the arbitration machinery in the industry (the CIAC). The CIAC has original and exclusive jurisdiction over disputes arising from or connected with contracts entered into by parties involved in construction in the Philippines, with the parties agreeing to submit the same to arbitration. Awards of the arbitral tribunal under the CIAC law are binding upon the parties, final and unappealable except on questions of law, which shall be appealable to the Supreme Court. Presently, proceedings in the CIAC are governed by the Revised Rules of Procedure governing Construction Arbitration, promulgated on 28 January 2011. Final awards by a CIAC tribunal are executable once 15 days have elapsed from the parties’ receipt of the award, and may be the subject of a writ of execution directed to a sheriff or other proper officer.

Other important rules on arbitration

Special ADR Rules

Some time after the ADR Act came into effect, the Supreme Court promulgated the Special Rules of Court on Alternative Dispute Resolution on 1 September 2009 (the Special ADR Rules), which took effect on 30 October 2009. The Special ADR Rules govern numerous issues relating to arbitration, including the relief available for parties with regards to the existence, validity or enforceability of the arbitration agreement; interim measures; assistance in taking of evidence; confidentiality; protective orders; appointment, challenge and termination of an arbitrator; confirmation, correction or vacation of a domestic arbitration award; recognition, enforcement or setting aside of an award in international commercial arbitration; and recognition and enforcement of a foreign arbitral award.

As in the ADR Act 2004, the Special ADR Rules highlight the policy of the state to actively promote the use of various modes of ADR and to respect party autonomy. Thus, these Rules encourage and promote the use of these modes, particularly arbitration and mediation, for the efficient resolution of disputes and to declog court dockets. To push for the use of these alternative modes, courts are duty-bound to refer parties to arbitration where parties have agreed to submit their dispute to such, and should not refuse to refer parties to arbitration. The Special ADR Rules likewise explicitly recognise the principles of competence-competence and separability of the arbitration clause. Courts are invited to exercise judicial restraint and to defer to the competence of the arbitral tribunal the opportunity to rule on issues of its jurisdiction. In general, however, the specific judicial relief available through the Special ADR Rules is only available if the place of arbitration as stipulated is the Philippines.

There is limited application of the Special ADR Rules on international arbitration, except for the portion on the recognition, enforcement or setting aside of an international commercial arbitration award. The Special ADR Rules dictate that any party to an international commercial arbitration in the Philippines may file for a petition to recognise and enforce, or petition to set aside, an arbitral award with regional trial courts, the venues of which are also outlined in the Rules. Courts may set aside or refuse the enforcement of the award on grounds that are similar to those in the New York Convention, though the latter is not specifically mentioned. A petition to set aside the arbitral award is the only recourse available to the parties, and any appeal or petition for review or petition for certiorari shall be promptly dismissed. Courts also have the power to suspend the proceedings pending before it to refer the award back to the arbitral tribunal to eliminate the grounds for setting aside, without directing the tribunal to revise the award or the findings, or otherwise interfere with the tribunal’s independence. The presumption overtly stated in the Rules is in favour of the confirmation of the award, unless the adverse party establishes a ground for the setting aside or non-enforcement of the award.

There are separate rules for the recognition and enforcement of a foreign arbitral award. Any party to the award may also file a petition with a regional trial court to recognise and enforce a foreign arbitral award. The New York Convention is explicitly referred to in the Special ADR Rules as the governing law, and the grounds enumerated in the Convention are the same grounds for refusal to recognise and enforce arbitral awards. The courts shall recognise and enforce the award unless a ground to refuse its recognition or enforcement is fully established. The decision made by the court under the Special ADR Rules can be executed immediately.

There is also a special rule for foreign arbitral awards made in a country that is not a signatory to the New York Convention. Courts shall recognise and enforce the same upon the grounds provided in the Special ADR Rules, when such country extends comity and reciprocity to awards made in the Philippines. Otherwise, the award is treated as a foreign judgment enforceable under the Rules of Court.

Department of Justice Circular No. 098-09

The Department of Justice (DOJ) also released Circular No. 098-09 (the Implementing Rules), promulgated on 4 December 2009, to implement the provisions of the ADR Act. This is a separate set of rules governing arbitration and the other modes of dispute resolution. As discussed below, though there are no contradicting provisions, some reconciliation of the these rules and those from the Supreme Court is necessary.

The Implementing Rules established the Office for Alternative Dispute Resolution to promote the use of ADR, and monitor its use and other relevant functions. The Implementing Rules have a separate chapter on international commercial arbitration where the seat of the arbitration is the Philippines and the arbitration must be governed by the Model Law. Due regard is given to the policy of the law in favour of arbitration and to actively promote party autonomy, as is the case with the ADR Act and Arbitration Law. The Implementing Rules expand on the law on the following points: the receipt of written communications; waivers; extent of court intervention (to be governed by the Special ADR Rules); definition and form of the arbitration agreement and claims before the court regarding the agreement; interim measures; composition of the arbitral tribunal, and grounds and procedure for challenge; jurisdiction of the arbitral tribunal; power of the tribunal to order interim measures; conduct of the arbitral proceedings, especially where the parties failed to agree, including the invocation of court assistance in taking evidence; correction and interpretation of awards; grounds for setting aside of the award by the regional trial court; recognition and enforcement of awards, filed in accordance with the Special ADR Rules; confidentiality of arbitration proceedings; consolidation of proceedings; and costs. There is also a chapter for domestic arbitration, which is still covered by the Arbitration Law, as amended by the ADR Act.

Once again, the competence of the arbitral tribunal is expressly recognised, as is the distinction between a ‘convention award’, which is governed by the New York Convention, and ‘non-convention awards’, the recognition and enforcement of which is in accordance with procedural rules of the Supreme Court. Courts, however, may recognise and enforce a non-­convention award as a convention award on the grounds of comity and reciprocity. Not present in the Special ADR Rules, but purposely included in DOJ Circular No. 098-09, is the statement that: ‘(A) foreign arbitral award when confirmed by the Regional Trial Court, shall be enforced in the same manner as final and executory decisions of courts of law of the Philippines.’ Decisions of recognition, enforcement, vacation or setting aside of an arbitral award, may, however, be appealed to the Court of Appeals, absent any stipulation by the parties that the award or decision of the arbitral tribunal shall be final and unappealable. These proceedings are summary in nature.

New York Convention

The application of the New York Convention is worthy of note. The Philippines is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, becoming a signatory thereto on 10 June 1958. The Convention entered into force in the Philippines on 1 June 1962.

Relevant jurisprudence on arbitration

Philippine jurisprudence has, since the 1920s, acknowledged that arbitration is an important aspect of dispute resolution. And many cases, even prior to the enactment of the ADR Act, have accorded respect to the mode of arbitration.2

The Supreme Court has repeatedly emphasised that arbitration is an inexpensive, efficient and amicable method of settling disputes, and has continually encouraged arbitration to be practised.3 The existence of an agreement between the parties to subject themselves to arbitration has been given utmost respect and has been treated as a binding contract. In line with this, the Supreme Court has also sanctioned the validity of arbitration clauses, interpreting such contracts liberally, and has generally subscribed to the view that if there is doubt on the interpretation of the arbitration clause, it should be resolved in favour of arbitration. Other than through legislation and various rules, Philippine jurisprudence has also recognised the doctrines of separability of the arbitration agreement,4 and the validity of arbitration clauses.5

These basic principles of arbitration have been uncontroversial in the eyes of the High Court. The issue of confirmation and enforcement was also tackled, even prior to the implementation of the two rules specifically governing it. The 2008 case of Korea Techonologies v Lerma was decided prior to the promulgation and coming into effect of the Special ADR Rules and DOJ Circular No. 098-09, but it presciently saw the need to discuss the confirmation of foreign arbitral awards by the regional trial court, and the power of the regional trial court to review foreign arbitral awards, and the grounds by which the awards may be set aside. However, the extent of the discussion of the court was limited, as the arbitration had not commenced at that point.

Trends and issues with regards to Philippine law and international arbitration

Philippine law and favor arbitrandum

There is no doubt that the Philippines is in favour of arbitration as a means of avoiding litigation and settling disputes amicably and expeditiously. Thus, arbitration clauses are liberally construed to favour arbitration, meaning that if there was an interpretation that would render an arbitration clause effective so as to avoid litigation and speed up the resolution of the dispute, that interpretation will be adopted.6 Unless an arbitration agreement deprives the parties of recourse to courts, courts should look with favour upon such amicable agreements. To ignore contractual agreements calling for arbitration is considered a ‘step backward’.7 Hence, even in issues regarding the liability of a corporation’s representatives to be subject to arbitration, the High Court has ruled that while a corporation has a separate personality from its representatives, and is generally not bound by the terms of the contract executed by the corporation or personally liable for obligations and liabilities of the corporation, it is deemed appropriate to pierce the corporate veil in order to initiate the arbitration proceedings against the parties, including the corporation’s representatives, on the basis of allegations of malice and bad faith. The Court has further justified its holding, stating that because the personalities of the representatives and the corporation may be found to be indistinct, even the directors may be compelled to submit to arbitration.

In one case, the dispute arose from the application of the arbitration clause in a lease contract. The arbitration clause stipulated that ‘any disagreement’ as to the ‘interpretation, application or execution’ of the contract should be submitted to arbitration. The Court cited the doctrine of separability and considered the arbitration agreement to be independent of the main contract and able to be invoked regardless of the possible nullity or invalidity of main contract. Here, all proceedings in the lower court were rendered invalid in recognition of the valid arbitration agreement.8 In another case, the Supreme Court upheld the rule that an arbitration agreement, forming part of the main contract, shall not be regarded as invalid or non-existent just because the main contract was invalid or did not come into existence. Even the party that has repudiated the main contract by filing for rescission is not prevented from enforcing the arbitration clause.9 However, in Stronghold Insurance Company, Inc v Spouses Stroem, the Supreme Court held that, given the particularities of the case (ie, the parties invoking the arbitration clause were not parties to the agreement), the arbitration clause could not be used. The decision in this case applies in other instances where the principle of privity of contracts should take precedence.10

Even in cases concerning the CIAC, courts have been fairly consistent in holding that an arbitration must proceed. Where the parties have already included in their subcontract agreement an arbitration clause, there was no need for any subsequent consent by the parties before the dispute can be raised before the CIAC.11 Where there is a valid arbitration clause mutually stipulated by the parties and it pertains to a construction dispute, they are contractually bound to settle their dispute through arbitration before the CIAC. The refusal of a party to participate should not affect the authority of the CIAC to conduct proceedings and issue an arbitral award.12

The above highlights the lack of issues surrounding international commercial arbitration cases that reach the Supreme Court. This may be a reflection of the lack of international commercial arbitration cases that are conducted within the Philippines.

Recognition and enforcement of foreign arbitral awards

Another issue that is especially relevant to the practice of international commercial arbitration is recognition and enforcement of arbitral awards.

As stated above, Chapter 7(B) of the ADR Act refers to the judicial review of foreign arbitral awards. The provisions of the Act have already been discussed above. Rule 13.12 of the Special ADR Rules also addresses the recognition and enforcement of an award when a country is not a signatory to the New York Convention, and the country does not extend comity and reciprocity to awards made in the Philippines. The Rule states that courts may treat the award as a foreign judgment enforceable under Rule 39, section 48, of the Rules of Court. DOJ Circular No. 098-09 contains the following statement: ‘A foreign arbitral award rendered in a state which is not a party to the New York Convention will be recognized upon proof of the existence of comity and reciprocity and may be treated as a convention award. If not so treated and if no comity or reciprocity exits, the non-convention award cannot be recognized and/or enforced but may be deemed as presumptive evidence of a right as between the parties in accordance with Section 48 of Rule 39 of the Rules of Court.’

The Rules of Court dictate that if a foreign judgment is made ‘upon a specific thing’ it is ‘conclusive upon the title to the thing’, and if it is made ‘against a person, the judgment [...] is presumptive evidence of a right as between the parties and their successors in interest’. It is noteworthy that section 44 of the ADR Act states:

A foreign arbitral award when confirmed by a court of a foreign country, shall be recognized and enforced as a foreign arbitral award and not a judgment of a foreign court. A foreign arbitral award, when confirmed by the regional trial court, shall be enforced as a foreign arbitral award and not as a judgment of a foreign court. A foreign arbitral award, when confirmed by the regional trial court, shall be enforced in the same manner as final and executor decisions of courts of law of the Philippines.

The issue that must be observed here is that the Rules of Court open the arbitral award to grounds for non-recognition or implementation similar to, but not exactly contemplated by, the New York Convention. Rule 39 of section 48 further states: ‘In either case, the judgment or final order may be repelled by evidence of a want of jurisdiction, want of notice to the party, collusion, fraud, or clear mistake of law or fact.’ Though it is observable that these grounds upon which the award may be questioned may fall within one or more of the categories for refusal set forth in article V of the Convention, the ground of ‘clear mistake of law or fact’ may embolden a local court to delve deeper into the award than necessary. The parties may similarly find flexibility in that same provision, and expand it even further than the interpretations of ‘public policy’ found in article V 2(b). This distinction made in the law, Special ADR Rules and the implementing rules is worthy of further study.

Since the promulgation of the Special ADR Rules and DOJ Circular No. 098-09, there has only been a handful of cases that reached the Supreme Court that pertain to the enforcement of foreign arbitral awards. In these cases, the Supreme Court held that a foreign corporation, though not licensed to do business in the Philippines, may sue in this jurisdiction to enforce a foreign arbitral award.13 The Court reasoned that none of the exclusive grounds in the New York Convention, and the ADR Act and Special ADR Rules, point to the capacity of the party seeking recognition and enforcement of the award. Further, it is in the interests of justice if foreign corporations not licensed to do business in the Philippines are allowed to avail of the courts to enforce foreign arbitral awards. In a 2015 case,14 the Supreme Court held that execution is a necessary incident to the Court’s confirmation of the arbitral award. Thus, the trial court’s power to confirm a judgment award under the Special ADR Rules was deemed included in the power to order its execution, it being a collateral and subsidiary consequence of granting the court the power to confirm domestic arbitral awards. The Court concluded that the Special ADR Rules should be made to apply to proceedings of confirmation of the award as well as to the execution of the confirmed award.

In another case, the Supreme Court determined that vacating arbitral awards should be based on statute. In this case, the Arbitration Law and Rule 11.4(b) of the Special ADR Rules were cited. Among the grounds discussed was evident partiality of the members of the arbitral tribunal. The court found that an arbitrator should conduct himself or herself beyond reproach and suspicion, and that his or her acts should be free from appearances of impropriety. However, one of the arbitrators was found by the Supreme Court as demonstrating evident partiality, thus the arbitral award was vacated.15

None of the more recent Supreme Court decisions has confronted the issue of a non-convention award being recognised or enforced in the Philippines, hence there has not been an occasion to apply these rules. In what has been decided, the Court has exclusively asserted the use of the Special ADR Rules, while there has yet been a case decided using DOJ Circular No. 098-09, despite its similarity with the provisions of the Special ADR Rules.

Notes

  1. Chung Fu Industries v Court of Appeals, G.R. No. 96283, 25 February 1992.
  2. The case of Chung Fu Industries v Court of Appeals, supra, provides an instructive outline of the history of arbitration in the Philippines up until that point.
  3. Allied Bank v Court of Appeals, G.R. No. 123871, 31 August 1998, LM Power Engineering Corp v Capitol Industrial, G.R. No. 141833, 26 March 2003, among a catena of other cases.
  4. Gonzales v Climax Mining, G.R. Nos. 161957 and 167994, 22 January 2007.
  5. Korea Technologies Co v Lerma, G.R. No. 143581, 7 January 2008.
  6. Lanuza Jr v BR Corporation, et al, G.R. No. 174938, 1 October 2014.
  7. Maria Luisa Park Association, Inc v Almendras, G.R. No. 171763, 5 June 2009, with citation to Malcolm, J.’s dissent in Vega v San Carlos Milling Co, G.R. No. 21549, 22 October 1924.
  8. Koppel, Inc v Makati Rotary Club Foundation, Inc, G.R. No. 198075, 4 September 2013.
  9. Cargill Philippines, Inc v San Fernando Regala Trading, Inc, G.R. No. 175404, 31 January 2011.
  10. Stronghold Insurance Company, Inc v Spouses Stroem, G.R. No. 204689, 21 January 2015.
  11. Heunghwa Industry Co, Ltd v DJ Builders Corporation, G.R. No. 169095, 8 December 2008, see also William Golangco Construction Corp v Ray Burton Development Corp, G.R. No. 163582, 9 August 2010.
  12. Metropolitan Cebu Water District v Mactan Rock Industries, Inc, G.R. No. 172438.
  13. Tuna Processing, Inc v Philippine Kingford, Inc, G.R. No. 185582, 29 February 2012.
  14. Department of Environment and Natural Resources v United Planners Consultants, Inc, G.R. No. 212081, 23 February 2015.
  15. RCBC Capital Corporation v Banco de Oro Unibank, Inc, G.R. No. 196171, 10 December 2012.